Cross-Strait Relations Between Taiwan and Mainland China: The Economic Imbalance and its Implications

Abstract

The cross-strait relations between Taiwan and China are critical in the Asia Pacific and the world. This study focuses on economic relations and their implications. The main conclusions include: First, the economic gap in output is increasingly larger, thus favouring China. Based on a time series robust least squares model, this study finds that this economic strength will significantly reduce the number of Taiwan’s foreign allies. At the same time, this economic strength also brings military imbalance. Second, by employing the Granger causality tests to examine the causality relations between the stock markets of Taiwan and China, which reflect the economic integrations in areas such as the trade of goods and services and capital flow, this study finds that China is in a dominant position. At the same time, Taiwan is in a dominated position. However, except for tourism, the effects of China’s dominant position as leverage seem limited.